Trading firm Goldman Sachs is getting into cryptocurrencies. (See also: Goldman Considering Bitcoin Trading.)
According to a Bloomberg report, the firm is setting up a trading desk for cryptocurrencies to be operational by June or earlier. It intends to become a market maker for cryptocurrencies and is working out details related to their security and custody. It has previously had a cautious stance towards digital currencies. Goldman CEO Lloyd Blankfein said bitcoin cannot be ruled out and the the company acts as a clearing agent for futures contracts. According to reports, Goldman is demanding 100 percent margin from brokers to clear trades. (See also: Goldman To Institutional Investors: Don’t Ignore Bitcoin.)
But the setting up of trading desks may be a win-win for digital currencies and Goldman itself. For cryptocurrencies, it brings liquidity and depth to the market. This is expected to curtail wild price swings for cryptocurrencies and bring price stability to the markets. At the same time, it will boost Goldman’s profits. The firm’s commodities division, where the new desk might be placed, has reported losses on the back of a swoon in commodity prices and lower client activity.
As Matt Levine from Bloomberg points out, bitcoin’s volatility might be an interesting play for Goldman. “You want a nice happy medium, volatile enough to get some action but not so volatile that you’re constantly losing your shirt,” he writes. With a range of between 75% to over 100% this year, bitcoin is among the year’s most volatile assets. For context, gold, a commodity to which bitcoin is often compared, has mostly moved upwards in price as its volatility hovers to percentages below 30. Traders prefer volatility in an asset’s price since it creates opportunities for arbitrage. As such, bitcoin’s volatility percentages could open up a new source of profit for Goldman.
Several institutional traders are exploring or have already made investments in cryptocurrencies. For example, Bloomberg earlier reported that analysts at JPMorgan Chase & Co. (JPM) are exploring realized volatility for bitcoin. This could be a precursor setting up a trading desk. In addition, hedge funds dealing in cryptocurrencies have reported stellar gains. (See also: Hedge Funds Reap Spectacular Returns From Cryptocurrencies.)
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns 0.001 bitcoin.